DRI Black Book: Materials & Dial-In

We will be hosting a black book conference call entitled "DRI: The Unthinkable Long Case" today at 1:00pm EST.

We are changing our view on Darden Restaurants, Inc. (DRI) and will be hosting a call with clients to talk through our reasoning. We have been bearish since July but now see little downside in the share price.

KEY TOPICS WILL INCLUDE

Our previously "unthinkable" short case came to fruition, now widely known

Bull/Bear Narratives

This note was originally published
at 8am on February 28, 2013 for Hedgeye subscribers.

“Evolution does not rely on narratives, humans do.”

-Nassim Taleb

That’s just a money quote from Taleb on page 207 of Antifragile. Apparently Jaime Dimon liked the book so much, he called his bank antifragile. I assume he wasn’t talking about the Bear Stearns part. If you’d like my review of the book, please send me a note.

Reviewing the Bullish Narrative for US and Asian stocks requires one to evaluate the bearish one. The big one our institutional clients debate with me comes from a player I respect, Francois Trahan. His Bearish Narrative is grounded in inflation concerns.

His call is a lot like mine was at the end of 2010. I get that inflation expectations rising would be bad. But our call is Strong Dollar will drive the opposite – Commodity Deflation. That’s not just a narrative; that’s precisely what we have been seeing for all of February.

Back to the Global Macro Grind…

Strong Dollar = Commodity Deflation? That’s also what we have been seeing for 2013 YTD:

US Dollar Index +2.3%

CRB Commodities Index -1.0%

SP500 +6.3%

Within the SP500’s +6.3% YTD return, the worst performing Sector ETF is Basic Materials (XLB) which is down -1.54% for February and underperforming badly at +2.34% YTD. If you want to be bearish on something, be bearish on Commodities and related stocks.

There’s also a Nouveaux Bear camp that thinks Commodities falling is the leading indicator that A) Global Economic Growth is going to slow and B) the US stock market is going down in flames. I have debated Dennis Gartman on this 2x on live TV in the last week.

Finally, there’s the central planning camp (led by Ben Bernanke) that is still bullish on the stock market’s “valuation”, and never thought we had the inflation we are deflating to begin with (Bernanke said in his testimony “I have the best track record on inflation since WWII”).

So, what is the Bearish Narrative?

A) Trahan: Debauched Dollar will drive us back to the bubble highs in Oil (2008), Gold (2011), and Food Prices (2012)

C) KM: I’m actually just bearish on The Taro Aso and The Bernank lying to uninformed people

I usually have a decent Bearish Narrative on something (like the Yen here), but the bear case for Asian and US stocks is all over the place right now. Maybe that’s why the only down day for stocks in the last 4 came on a catalyst that none of these bears had to begin with (Italian Election). That’s not a research call, that’s being right for the wrong reasons (otherwise known as luck).

Another Q: KM, what about The Correlation Risk (inverse correlation vs USD) call that you used to trade Macro on during 2010-2012? First, Correlation Risks are not perpetual. And, second, our intermediate-term TREND correlation model is changing, big time, right now:

In other words, both the Americans and the Chinese are loving Strong Dollar in more ways than one. It’s taking down Energy and Food Inflation. And it’s a tax cut that our central planning overlords are unable to provide.

That’s great for the one thing we haven’t had, sustainably, under either the Keynesian Bush or Obama regimes – real (inflation adjusted) economic growth. Of course, the government is always my Bearish Narrative, but I think my bullish one for stocks is still intact.

Our immediate-term Risk Ranges for Gold, Oil (Brent), US Dollar, USD/YEN, UST 10yr Yield, and the SP500 are now $1549-1609, $110.67-112.68 (Oil is bearish TRADE and TREND now; a very bullish catalyst for the economy), $81.28-82.13, 91.71-94.67, 1.85-1.96%, and 1499-1536, respectively.

THE M3: WMS; MPEL PHILIPPINES; PACKAGE TOUR NUMBERS

According to Business Daily, WMS is likely to make a fresh bid for market share in Macau following its acquisition by Scientific Games Corp.

PHILIPPINE GROUP AND MELCO CROWN INK US$1 BILLION DEAL Macau Business

MPEL has finalized its partnership with Belle Corp for a US$1 billion (MOP8 billion) gaming complex at Manila Bay. The deal effectively finalized the cooperation agreement Belle had signed with MPEL last October.

PACKAGE TOURS AND HOTEL OCCUPANCY RATE FOR JANUARY 2013 DSEC

Visitor arrivals in package tours increased by 18.3% YoY to 757,190 in January 2013. Package tour visitors mainly came from Mainland China (562,722), with 250,029 coming from Guangdong Province, followed by those from Taiwan (55,473); the Republic of Korea (42,469) and Hong Kong (30,763).

There were 100 hotels and guesthouses operating at the end of January 2013, providing 26,027 rooms, up by 16.5% YoY.

In January 2013, the hotels and guesthouses received 832,543 guests, up by 19.1% YoY, with the majority coming from Mainland China (60.3% of total) and Hong Kong (14.5%). The average length of stay of guests decreased by 0.13 night YoY to 1.4 nights. Meanwhile, the average occupancy rate of hotels and guesthouses stood at 82.9%, up by 3.8% points YoY, with 5-star hotels reaching 84.9%.

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CHART OF THE DAY: Ears Up

Ears Up

“You can judge by his eyes and ears. One cannot read bears like that.”

-John Vaillant, The Tiger

Is this a bull or a bear? Whatever it is, and whether you decide to use behavioral ecology, interconnected macro math, or licking your finger, you have to decide on some type of signaling process to answer the question.

Knowing where you are in an economic cycle matters as much as understanding where your predator is (the other side of the trade). That’s why I think Vaillant’s epic true story of a man-eating tiger in Siberia is so relevant to my market day.

“If you see that his ears are down, that’s not a good sign. Then you have to look at him in the eye with all the rage you can muster and the tiger will stop and back off.” (The Tiger, pg 248) When do you think the bulls will back off lifting your offers?

Back to the Global Macro Grind…

How are the bears going to stop the US stock market from going up? Since there’s a bull market in top-calling right now, are they going to talk it down? That sounds scary. But does that have any teeth?

“You know, the ears are her steering wheel. You can turn off her teeth with the ears” (The Tiger, pg 96).

Admittedly, that advice comes from a Russian who used to “bag” tigers alive. Reading through Vaillant’s account of encounters with these big cats, I wouldn’t take a stroll into the taiga and try that alone. Neither would I short SPY’s with the VIX signaling 10.

Process Review: there are 2 main parts to how I make risk managed decisions in markets:

1. Risk Management Signals

2. Research Views

The Research and Risk Signals aren’t always aligned, but when they are, I move. Instead of the ridiculous “risk on, wax off” thing the sell-side implemented into Old Wall vernacular, let’s think of the market’s main risk (beta) as either having its Ears Up/Down.

Only 1 of those 6 Global Equity markets has its Ears Down. That 1 of 6 is not like the others because the Bovespa is a heavily weighted commodity stock market. This is why not everyone agrees with the fulcrum point of our Research View; not everyone gets paid by a Strong Dollar, Down Commodities. Know how people get paid, and you’ll know their confirmation biases.

Ears Down in Oil? Yep. And guess what’s driving that? #StrongDollar. While the immediate-term TRADE correlation between the SP500 and USD is currently POSITIVE (+0.84), for Brent Oil vs USD it’s NEGATIVE (-0.88). That’s another way to think about signaling without losing yourself in a Ph.D dissertation about causality.

Like a charging bull, bear, or tiger, the Correlation Risk happens fast. And unlike these non-domesticated animals, these mathematical monsters run fast, both ways. So keep those eyes and ears open!

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